Connecting the Dots

May 4, 2023

Last week the Fed got to review their pet inflation numbers… the Personal Consumption Expenditure Price Index (PCE).

The reports weren’t terrible.

But they weren’t great either. 

The main number showed prices increased 4.2% year over year. That was down from a revised 5.1% increase the previous month. Things are moving in the right direction.

The core number — the one that takes out food and energy prices — was a little more problematic. It printed at 4.6% (down from 4.7%). The core number’s relatively flat action compared with the headline number which has declined fairly consistently (seven times over the last nine months) is telling the market that while food and energy prices are coming down, the prices of everything else aren’t.

And I hate to keep reminding you that these numbers represent the rate of change of inflation — i.e. how fast prices are rising — not prices themselves. You’re still paying top dollar for everything…

Personal Consumption Expenditure Index


So on the inflation front, the news is mixed at best.

Another Iffy Report

There was another all-important report that came out last week as well — GDP.

GDP is the measure of all the goods and services bought and sold in the US — in other words, how prosperous we are. And last Thursday, the Bureau of Economic Analysis reported that we are still prosperous. GDP rose 1.1% in the first quarter of 2023.



This is the BEA’s preliminary guesstimate. That number will be revised two more times over the next two months before a final number is established. By then no one will care and everyone will be looking for Q2’s GDP guess.

GDP as the BEA delivers it, is a backward looking number which is of little use to investors. A more interesting model is something put out by the Atlanta Fed called GDPNow. In GDPNow their economists attempt to track the country’s GDP in real time (no easy feat). 

The image below is a screenshot of their latest estimate from the day before the BEA released their number. You can see they nailed it!

You can also see the trend of their predictions in the chart. From January to mid-March they had been expecting a significantly higher number. In March their estimate peaked at roughly 3.5% — which would have been a healthy number. 

But you can see the significant weakening in the later part of the quarter.

Source: The Federal Reserve Bank of Atlanta

They’re predicting 1.7% growth in the second quarter already.

Connecting the Dots

I’ve explained before that the GDP number is not adjusted for inflation. And I’ve contended that much of the “strength” we’ve seen since the pandemic has been due to inflation rather than outright economic growth. 

In other words the economy is likely weaker than you’re hearing from the economic reporters. I may be wrong, but if nothing else, an investor should take these reports with a grain of salt. 

Now… They say there’s no recession until the NBER says there is. But ordinary people everywhere have lost wealth and purchasing power to inflation as real wages have declined for two years. 

With price increases (and prices) stuck in a stubbornly inflated mode and GDP seeming to underperform, the prospects of a stagflationary environment have just gone up!

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily